On Monday, Republican presidential candidate Donald Trump will unveil a detailed tax reform plan — and he is already positioning it as a populist proposal. In a press alert about the plan, the campaign states, “Essentially, the plan is a major tax reduction for almost all citizens and corporations, in particular, those in the middle and lower income classes.”
And already, the portion of the plan that affects low-income Americans, which would impose a zero percent tax rate on individuals who make less than $25,000 and married couples who make less than $50,000, is generating headlines. “Trump promises a ZERO per cent tax rate for millions: He plans to cut tax for the poor, middle classes and corporations, soak the rich,” the Daily Mail headline reads. “Mr. Trump’s plan appears designed to help him, as the GOP front-runner, cement his standing as a populist,” the Wall Street Journal article previewing the details states.
But the plan has a number of provisions that will overwhelmingly help the already well off.
Lower taxes for corporations
Trump proposes the lowest corporate tax rate of the entire Republican presidential field so far. He would reduce the rate to just 15 percent; by contrast, Sen. Marco Rubio (FL) would reduce it to 25 percent, while Jeb Bush would impose a top 20 percent corporate rate. That would be the on-paper tax rate; American companies already pay relatively low tax rates in reality, however. Thanks to their ability to take advantage of loopholes, tax breaks, and aggressive accounting schemes, the effective rate they pay is already under 20 percent. Meanwhile, although Trump says his tax reform plan will “create jobs and incentives of all kinds while simultaneously growing the economy,” lower corporate taxes don’t tend to go hand in hand with higher growth. There is no evidence that high rates hurt the economy; rather, those that pay the highest effective rates actually create more jobs than those that find ways to pay less.
And he would also impose a one-time, mandatory 10 percent tax on the profits American corporations hold overseas, which could be paid over a few years, to entice them to bring them back here and in theory create more jobs. A similar although slightly different plan, called a “repatriation holiday,” has been tried before, where corporations were offered a low, temporary tax rate on offshore profits to bring them home. When it was imposed in 2004, companies largely used the profits they brought back to give money to shareholders, rather than invest it in hiring or equipment, and many laid off large number of workers at the same time.
Lower taxes for the rich
It’s not just the poorest who would get a tax cut under Trump’s plan. The wealthy would get a hefty reduction too. The highest individual tax bracket, which would apply to married couples who make more than $300,000, would be lowered from the current 39.6 percent rate to 25 percent. That’s an even lower top tax rate than under Bush’s plan, which proposes a top 28 percent on income; yet analysis of Bush’s plan found that the top 1 percent of earners would get the overwhelming benefit of his tax cuts, with an 11.6 percent increase in after-tax income compared to 1.8 percent more for the poorest and between 2.3 and 3.1 percent for the middle class. As with lowering the top corporate tax rate, there’s little evidence that lower income taxes help spur job growth, as it’s historically been stronger under higher rates. Some economists have found that the optimal tax rate for the wealthiest is closer to 90 percent.
Giveaways to the wealthiest
Trump’s plan would also get rid of the estate tax, which only affects the wealthiest 0.14 percent of Americans. Thanks to reductions in the rate over the years and creative methods of getting around it, those who owe it only pay an effective 16.6 percent rate, and less than 10 percent of the $60 trillion that will get passed down to wealthy heirs and charities over the next half century will be paid in estate tax. Nevertheless, it is a significant and progressive source of government revenue, since it only impacts those most able to pay yet will generate $246 billion over the next decade.
And while Trump would follow through with his rhetoric calling out the lower tax rate hedge fund managers pay on the income they earn from doing their jobs by ending the carried interest loophole, he would also cut the top capital gains tax rate to 20 percent. The current code already means that income made from investments enjoys a much lower 23.8 percent rate than income made from work, which is taxed at a top 39.6 rate. And those who enjoy the benefits of a lower capital gains rate are mostly the rich: 70 percent of the money saved through a lower rate goes to the top 1 percent of earners, while just 7 percent goes to the bottom 80 percent. The lower capital gains tax rate is one of the biggest contributors to growing income inequality.